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What happened with Natus Medical this quarter?

The year-over-year fall in revenue was due to the ship hold at Natus' Seattle facility and a slowdown of sales outside the U.S., both of which were previously disclosed. Management estimates not shipping products out of the facility while it satisfies regulators' concerns resulted in a $5 million to $6 million hit to revenue.

On the bright side, the company's service businesses, Peloton and Global Neurodiagnostics (GND), continued their strong growth with combined revenue up 53% year over year.

RetCam, which Natus recently acquired, added $3.4 million, but more importantly, the sales are already adding to the earnings. That's the kind of bolt-on acquisitions Natus should be making.

Despite the fall in revenue, the bottom line was up as gross margins improved due to selling higher margin products, the aforementioned decrease in international sales that typically have lower margins, and the addition of RetCam that has higher margins.

While earnings grew substantially from the year-ago quarter, the increase was entirely due to lower taxes. That isn't something that can continue to go down year after year, although the acquisition of Otometrics and a shift to overseas revenue with lower tax rates should benefit Natus' tax hit next year.

What management had to say

Natus' president and CEO, Jim Hawkins, continues to be excited about the purchase of GN Store Nord's Otometrics business that was announced last month and is scheduled to close on Jan. 1. In addition to increasing operating profit margins to grow the bottom line, Hawkins thinks "Otometrics can grow organically by 5% or more in the years ahead."

Natus has typically grown through these types of acquisitions, and that doesn't appear to be changing anytime soon. "We are, I would say, still looking to do other acquisitions," Hawkins commented, adding that while the hearing screening part of the business will be busy integrating Otometrics, the neurology side has "plenty of capacity to bring something else on."

Looking forward

Management guided for fourth-quarter revenue of $107 million to $109 million, which is 8% higher than the year-ago quarter at the midpoint of guidance. Natus is expecting about $7 million in revenue from its new contract with Venezuela, but the guidance doesn't include any revenue from the aforementioned ship hold. Those sales are mostly just delayed rather than lost as management said they've had very few cancellations of orders for the products on the ship hold.

On the bottom line, management expects earnings of $0.46 to $0.49 per share on a GAAP basis and adjusted earnings of $0.52 to $0.55 per share. On an adjusted basis, that's about 5% growth at the midpoint.

Next year, operating margins may slip a little with the inclusion of Otometrics since Natus is shooting for a 10% operating profit margin in 2017 for the new segment. But Natus thinks it can raise Otometrics' operating profit margins to 20% in 2018, in line with the rest of Natus' business.